C H A P T E R

1
Globalization &
International
Business &
Organization
Md. Awal Al Kabir
Associate Professor
Jahangirnagar University

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Globalization

The broadening set of interdependent relationships

among people from different parts of a world that
happens to be divided into nations.

The shift toward a more integrated and

interdependent world economy
Two components:
 The globalization of markets
 The globalization of production

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Globalization of Markets

The merging of distinctly

separate national markets into a
global marketplace
 Falling barriers to cross-border
trade have made it easier to sell
internationally
 Tastes and preferences converge
onto a global norm
 Firms offer standardized products
worldwide creating a world market
 Globalization of Production

Refers to sourcing of goods and services from

locations around the world to take advantage of
 Differences in cost or quality of the factors of
production
 Labor
 Land
 Capital
 Globalization of Production

Impediments to the globalization of production

include
 Formal and informal barriers to trade
 Barriers to foreign direct investment
 Transportation costs
 Issues associated with economic risk
 Issues associated with political risk
Factors in Increased Globalization

 Liberalization of cross-border trade and resource

movements
 Increase in and expansion of technology
 Development of services that support international
business
 Growing consumer pressures
 Increased global competition
 Changing political situations
 Expanded cross-national cooperation

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Factors in Increased Globalization (Continued…)

 Liberalization of Cross-Border Trade and Resource

Movement
Over time most governments have lowered restrictions
on trade and foreign investment in response to the
expressed desires of their citizens and producers.

 Increase in and Expansion of Technology

Vast improvements in transportation and
communications technology—including the
development of the Internet

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 Declining Trade and Investment Barriers

 Advanced industrial nations of the West

committed themselves after World War II to
removing barriers to the free flow of goods,
services, and capital between nations.
1913 1950 1990 2002
France 21 % 18 % 5.9 % 4.0 %
Germany 20 % 26 % 5.9 % 4.0 %
Italy 18 % 25 % 5.9 % 4.0 %
Japan 30 % -- 5.3 % 3.8 %
Holland 5% 1% 5.9 % 4.0 %
Sweden 20 % 9% 4.4 % 4.0 %
Great Britain -- % 5.9 % 4.0 %
United States 44 % 14 % 4.8 % 4.0 %
Growth Trends

Figure 1.2: Growth of World Trade, Production

and FDI, 1992-2004

800
700
600
Index 1992=100

500
400
300
200
100
0

World Trade World Production FDI Outflows

Affects of Lowering Trade
Barriers
Figure 1.1: Volume of World Trade and World
Production, 1950-2004

3100

2600
In d e x 1 9 5 0 = 1 0 0

2100

1600

1100

600

100

Total Merchandise Exports World Production

The Role of Technology

 Sincethe end of World

War II the world has
seen advances in
 Communication
 Information processing
 Transportation technology
Internet Usage Growth

Figure 1.3: Internet Users per 1000 People, 1990-

In t e rn e t U s e rs p e r 1 0 0 0 p e o p le 2003

700.00

600.00

500.00

400.00

300.00

200.00

100.00

0.00
1991
1992

1994
1995
1996

1998

2002
1990

1993

1997

1999
2000
2001

2003
Japan United States European Monetary Union World
 Factors in Increased Globalization (Continued…)

 Development of Services that Support International

Business
Services provided by government, banks, transportation
companies, and other businesses greatly facilitate the conduct
and reduce the risks of doing business internationally.

 Growing Consumer Pressures

Now consumers are well-informed about and often able to
access foreign products. Thus competitors the world over
have been forced to respond to consumers’ demand for
increasingly higher quality, more cost-competitive offerings.
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Factors in Increased Globalization (Continued…)

 Increased Global Competition

The pressures of increased foreign competition persuade
firms to expand internationally to gain access to foreign
opportunities and to improve their competitiveness.

 Changing Political Situations

The transformation of the political and economic policies
of Eastern Europe, Vietnam, and China has led to increases
in trade between those countries and the rest of the world.

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Factors in Increased Globalization (Continued…)

 Expanded Cross-National Cooperation

Governments have increasingly entered into cross-national
treaties and agreements in order to gain reciprocal
advantages for their own firms, to jointly attack problems
and to deal with areas of concern that lie outside the
territory of all countries.

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The Criticisms of Globalization
 Threats to national sovereignty
 Growth and environmental stress
 Growing income inequality

 Threats to National Sovereignty

Many citizens fear that a country’s participation in
multilateral agreements will diminish its sovereignty and
freedom. People are concerned that globalization will
bring the homogenization of products and traditional
ways of life—including language and social structure.
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The Criticisms of Globalization (continued….)

 Economic Growth and Environmental Stress

Economic growth can result in both positive and
negative consequences, including damage to society and
the environment. While globalization can support the
sustenance of natural resources & environmentally
sound planet.
 Growing Income Inequality
It may speeds up the process of altering the relative
economic discrepancies between the two countries
involved. 6-17
The Globalization Debate
 Pro Factors
 Lower prices for goods and
services
 Economic growth
stimulation
 Increase in consumer
income
 Creates jobs
 Countries specialize in
production of goods and
services that are produced
most efficiently
 Con Factors
 Destroys manufacturing jobs
in wealthy, advanced
countries
 Wage rates of unskilled
workers in advanced
countries declines
 Companies move to
countries with fewer labor
and environment regulations
 Loss of sovereignty
International Business

All commercial transactions—including sales,

investments, and transportation—that take place
between two or more countries.

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International Business:
Operations and Influences

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Reasons That Firms Engage in
International Business
 Expanding sales
 Acquiring resources
 Minimizing risk

 Expanding Sales
Companies may increase the potential market for their
sales by pursuing international consumer and industrial
markets.

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 Acquiring Resources
Foreign-sourced products, services, resources, and
components can make a firm more competitive both at
home and abroad.

 Minimizing Risk
Firms seek foreign markets in order to minimize cyclical
effects on sales and profits.

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Entry Modes
Firms can use six different methods to enter
a market
 Exporting
 Turnkey Projects
 Licensing
 Franchising
 Joint Ventures
 Wholly Owned Subsidiaries
Exporting
Advantages:
 Avoids cost of establishing manufacturing
operations
 May help achieve experience curve and location
economies
Disadvantages:
 May compete with low-cost location manufacturers
 Possible high transportation costs
 Tariff barriers
 Possible lack of control over marketing reps
Turnkey projects
Advantages:
 Can earn a return on knowledge asset
 Less risky than conventional FDI Contractor agrees
to handle every
Disadvantages: detail of project
for foreign client
 No long-term interest in the foreign country
 May create a competitor
 Selling process technology may be selling
competitive advantage as well
Licensing: Advantages
Reduces development costs and risks of establishing
foreign enterprise
Lack capital for venture
Unfamiliar or politically volatile market
Overcomes restrictive investment barriers
Others can develop business applications of
intangible property Agreement where
licensor grants rights to
intangible property to another
entity for a specified period
of time in return
for royalties.
Franchising
Advantages:
 Reduces costs and risk of establishing enterprise
Disadvantages:
 May prohibit movement of profits from one country
to support operations in another country
 Quality control
Franchiser sells
intangible property
and insists on rules
for operating business
Joint Ventures
Advantages:
 Benefit from local partner’s knowledge
 Shared costs/risks with partner
 Reduced political risk

Disadvantages:
 Risk giving control of technology to partner
 May not realize experience curve or location
economies
 Shared ownership can lead to conflict
Wholly Owned Subsidiary
Subsidiariescould be Greenfield
investments or acquisitions
Advantages:
 No risk of losing technical competence to a
competitor
 Tight control of operations
 Realize learning curve and location economies

Disadvantage:
 Bear full cost and risk
Acquisition or Greenfield
Acquisitions are Greenfield ventures
attractive if: are attractive if:
 There are well  There are no
established firms competitors
already in operation  Competitors have a
 Competitors want to competitive advantage
enter the region that consists of
embedded
competencies, skills,
routines, and culture
Strategic Alliances
Cooperative agreements between potential or
actual competitors
Advantages:
 Facilitate entry into market
 Share fixed costs
 Bring together skills and assets that neither company has
or can develop
 Establish industry technology standards
Disadvantages:
 Competitors get low cost route to technology and markets
 Stages of International Development

Global

Multinational

International

Domestic

Introduction Structural Designs Home/heterarchical M&N Transnational form Case Study Scenarios
 International corporate structure model

High
Economies of
global
standard- Global Transnational
ization and
size
International
Multidomestic
explorer

Low High
need for localization

Introduction Structural Designs Home/heterarchical M&N Transnational form Case Study Scenarios
A multinational corporation is a term usually used to refer to
any and all types of international companies that maintain
operations in multiple countries.
 A multidomestic organization is an MNC that decentralizes
management and other decisions to the local country, which
reflects the polycentric attitude.
 A global organization is an MNC that centralizes management
and other decisions in the home country, which reflects the
ethnocentric attitude.
 A transnational (or borderless) organization, which reflects the
geocentric attitude, is an MNC that has eliminated artificial
geographical barriers and uses best work practices and
approaches from wherever. A born global organization is an
organization that has been global from inception.